Actively managed ETFs offer access to fixed-income markets

Exchange-traded funds (ETFs) hit a milestone in Canada earlier this year – more than $120-billion in assets are now under management in this country alone.

The explosive growth in ETFs is part of a global trend, notes Michael Cooke, a senior vice-president and head of exchange-traded Funds at Mackenzie Investments in Toronto. “We’re seeing all kinds of indications in markets around the world that ETF use is accelerating,” he says. In Febru¬ary, global assets under management hit a record of $3.689-trillion (U.S.) and there are no signs that this is about to slow down.

“This growth coincides with a real proliferation with a number of products available, as well as the number of ETF providers that are joining the market¬place,” Mr. Cooke says. One of the rea¬sons for of the popularity of ETFs is that investors consider them to be a cost effective option for a portfolio.

In April 2017, Mackenzie celebrates the one-year anniversary of its ETF business in Canada. “We’re adding to our fixed-income suite now,” Mr. Cooke says.

With 18 fixed-income professionals, the company launched four ETF prod¬ucts last year; this spring it’s launch¬ing a global high-yield fixed-income ETF, the Mackenzie Global High Yield Fixed Income (MHYB).

“MHYB will have the flexibility to introduce other higher-yielding asset classes, such as senior loans, emerg¬ing market debt, as well as sovereign and investment-grade corporate debt. It will all be under the objective of de¬livering a higher-yielding outcome for the end investor,” Mr. Cooke explains.

Improving cost management and managing risk are two of the most significant trends in fixed-income ETFs right now, Mr. Cooke adds. “This comes against a backdrop where we may see more muted returns looking forward across many financial markets.”

Investors are witnessing tightening monetary policies, with the U.S. Feder¬al Reserve raising interest rates. While the Bank of Canada and other central banks might not follow this lead im¬mediately, the expectation among investors is that their returns will be more modest in the near future.

“With investors [who] are sensitive to the net returns they’re earning, they’re monitoring their costs more closely,” Mr. Cooke says. “Some ana¬lysts are suggesting that we’re seeing a bottom in the 30-years-plus bond bull market of falling interest rates. I’m still a bit skeptical about that, though, because in some ways we’re still recovering from the [2008] finan¬cial crisis.”

But we’re far from a situation like that of the early 1990s, when inter¬est rates doubled, according to Mr. Cooke. “We have an uneven econom¬ic recovery, and some countries and regions are further along the growth curve than others. Generally speak¬ing, we still have below-trend global GDP growth, especially this late in an economic cycle,” he explains. “Any adjustments to monetary policy are going to have to be carefully mea¬sured and will reflect the impact that they’ll have on the global economy.”

Nevertheless, he notes, “One of the trends we’ve seen among our clients is a desire to reduce interest-rate sen¬sitivity in their portfolios through the inclusion of shorter-duration or high¬er-yielding assets classes.”

High yield fixed-income markets are more difficult to access and rela¬tively complex to understand.

“Such markets lend themselves to more active management,” Mr. Cooke says. “It’s just as important to make a decision about what you do not own as much as what you do own,” he adds. Active management is helpful in assessing non-investment-grade areas of the bond market where there is more credit risk, and the solvency of the issuer needs to be looked at more closely.

“It requires a professional eye to look at balance sheets, cash flow and profitability to determine whether you’re making a good decision as a bond investor. That’s where active management can add value,” he says.

With prevailing uncertainty in bond markets, investors will want to turn toward management that is good at managing both investment costs and risk. Active fixed-income ETFs pro¬vide exactly that. It can make sense to diversify regionally, Mr. Cooke says. “Investors can complement their core exposure to Canadian government and investment-grade corporate bonds with diversification across various fixed income asset classes and countries.”

Active management can help inves¬tors achieve this diversification with¬out being exposed to excessive risk.

All in all, ETFs are very cost-effec¬tive vehicles, Mr. Cooke notes. “In a world where net returns matter most to investors, managing for the cost of the investment has become more im¬portant, making the cost effectiveness of ETFs critical. The fact that you can get diversified exposure to a fixed-in¬come asset class with one unitized offering is also very compelling.”

ETFs also make the bond market accessible. “ETFs give investors more information as to the level at which they can buy or sell. They also pro¬vide liquidity because they trade on an exchange,” Mr. Cooke says. “The ETF has become an efficient vehicle for investing in many different asset classes, [and] certainly for fixed-in¬come markets.”

Michael CookeSenior Vice-president and head of ETFs at Mackenzie Investments

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